Rebate claim under Rule 18 of CER, 2002

Case: UNION OF INDIA THROUGH THE COMMISSIONER OF CENTRAL EXCISE, RAIGAD v/s SHARP MENTHOL INDIA LTD, DELHI & ANOTHER

Citation - 2011-TIOL-490-HC-MUM-CX

Issue:- Whether Assessee entitled to claim rebate of duty paid on export of dutiable by-product peppermint oil by reversing credit of duty paid on inputs used in the manufacture of exempted menthol crystals?

Brief Fact:- Respondent No. 1 - assessee is engaged in the manufacture and export of menthol crystals BP/USP and flavouring materials such as peppermint oil by using menthol (liquid)/dementholised oil as the raw materials. Assessee has its manufacturing units at several places including units at New Delhi, Rajasthan, etc. Peppermint oil emerges as a by-product in the manufacture of menthol crystals and than it is subjected to a process by which the impurities are removed and then cleared for export. Although the process of removing the impurities does not amount to manufacture, the peppermint oil which emerges in the process of manufacturing menthol crystals is excisable under the Central Excise Act, 1944.

Assessee took credit of duty paid on menthol and utilized the said credit in paying the duty on clearance of final products namely, menthol crystals and peppermint oil. The excise duty on menthol crystals was exempted by a Notification No. 4/2008-CE dated 01.03.2008 However, levy of excise duty on peppermint oil continued. Thus, with effect from 01.03.2008 menthol crystals were liable to be cleared without payment of duty, whereas, peppermint oil was liable to be cleared on payment of duty. Assessee has cleared menthol crystals for export under bond without payment of excise duty and cleared peppermint oil for export on payment of excise duty by debiting the input credit availed on menthol used in the manufacture of final products. Since rebate of duty paid on exported goods is allowable under Rule 18 of the Central Excise Rules 2002, assessee applied for rebate of duty paid on export of peppermint oil.

Department was of the opinion that since menthol crystals manufactured from menthol was exempt from payment of duty, the credit of duty paid on menthol (input) was not available and consequently, the assessee could not have utilized the said input credit in paying the excise duty on clearance of peppermint oil for export. Accordingly, show-cause notices were issued to the assessee for recovery of excise duty on peppermint oil exported by the assessee.

Assessee replied that since both the final products were exported, they were entitled to utilize input credit in paying excise duty on peppermint oil and claim rebate of that duty. The Adjudicating Authority accepted the contention of assessee and dropped the proceedings.

Revenue has filed an appeal against the Order dated 31/8/2009 which is pending before the Tribunal at New Delhi.

Excise Authorities in Rajasthan also issued show cause notice to the assessee proposing to reject their rebate claim on the ground that in the Bhiwadi Unit at Rajasthan, the peppermint oil was subjected to a process to remove the impurities and such a process of removing the impurities does not amount to manufacture and, therefore, no excise duty was payable on clearance of purified peppermint oil and consequently allowing the rebate claim of duty paid on purified peppermint oil does not arise at all.

In this regard, the assessee contended that even if the process of removing the impurities in the peppermint oil did not amount to manufacture, excise duty was payable on the manufacture of peppermint oil and, therefore, duty had to be paid at the time of clearance of peppermint oil and when peppermint oil is exported on payment of duty, the exporter is entitled to seek rebate of that duty paid on peppermint oil. The explanation given by assessee was accepted and by Order in Original dated 06.04.2010 show cause notice was dropped and rebate claim was allowed.

Subsequently, Revenue has filed appeal against the Order dated 6/4/2010 and the same is pending.

In the meantime, rebate claims filed by Assessee from time to time before the Maritime Commissionerate, Raigad were initially allowed and rebate amount of Rs.45,68,70,421/- and Rs.37,51,698/- were sanctioned and paid to the assessee vide two orders in original dated 1/9/2009 and 22/9/2009 respectively, but without allowing interest claimed by the assessee under Section 11BB of the Central Excise Act, 1944.

However subsequent rebate claims filed by assessee seeking rebate were rejected by the Commissioner, Raigad by three orders in original all dated 30/4/2010 on the ground that rebate claim was not allowable. Challenging the orders in original dated 1/9/2009 and 22/9/2009 whereby the rebate claim was allowed, the revenue filed appeals before Commissioner (A). Similarly, challenging the three orders in original all dated 30/4/2010 whereby rebate claim was rejected, assessee filed appeals before Commissioner (A).

By a common order dated 14/09/2010, the Commissioner (A) dismissed the appeals filed by Revenue and allowed the appeals filed by assessee. As a result whereof assessee became entitled to receive rebate amount of Rs.29,59,27,180/-, Rs. 4,40,35,200/- and Rs.1,16,77,065/- and retain the rebate amount already received under orders in original dated 1/9/2009 and 22/9/2009.

Challenging the order passed by the Commissioner (A) on 14/9/2010, Revenue filed Revision Applications under Section 35EE of the Central Excise Act, 1944. Along with the Revision Applications, Revenue filed applications seeking stay of the order passed by the Commissioner (A).

By the impugned order dated 21/1/2011 the Joint Secretary, Government of India rejected the stay application firstly, on the ground that there is no provision for grant of stay in revision proceedings and secondly, since similar rebate claims have already been allowed and paid in the past, it was not a fit case for grant of stay.

Challenging the aforesaid order, the Commissioner of Central Excise, Raigad has filed Writ Petition before the High Court.

Petitioner’s Contentions:- Revenue submitted that since Assessee has manufactured both dutiable and exempted goods but failed to maintain separate accounts for receipts, consumption and inventory of the inputs as per Rule 6 (1) & 6 (2) of the CENVAT Credit Rules, 2004, assessee is not entitled to avail credit of duty paid on inputs used in the manufacture of exempted goods. It was submitted that as per Rule 6(6)(v) of 2004 Rules, the Assessee is not required to comply with the provisions of sub-rules (1) (2),(3) & (4) of Rule 6 if the excisable goods are cleared for export under bond. In the present case, the Assessee has nor cleared the peppermint oil for export under bond and, therefore, the shelter provided under Rule 6(6)(v) is not applicable and Rule 6(1) is attracted in the present case.

It was submitted that the Assessee has deliberately paid duty on peppermint oil by debiting the lapsed/unavailable CENVAT credit with malafide intention to claim that amount by way of rebate claim, it is established that duty paid inputs are used in the manufacture of final products which are exempted, then the credit of duty paid on inputs is not available and if the credit is already taken, the same has to be reversed or would lapse. In any event, the issue relating to lapsed/unavailable CENVAT credit is pending before the Tribunal, New Delhi in the assessee's own case and if at all rebate is to be sanctioned by Maritime Commissionerate, Raigad, the same can be sanctioned only after the decision of the Tribunal, New Delhi.

Respondent’s Contentions:- Assessee submitted that exempted final products are cleared for export under bond as per Rule 6(6)(v) of 2004 Rules, then Rule 6(1) to 6(4) of 2004 Rules do not apply. In such a case, Rule 5 of the 2004 Rules provide that the exporter is entitled to utilize the input credit availed on the exempted final product to pay excise duty on dutiable final product. Accordingly, in their case, credit of duty availed on menthol used in the manufacture of exempted menthol crystals has been utilized in paying the excise duty on peppermint oil as per Rule 5 of 2004 Rules. Since duty paid on exported goods is allowable as rebate, the assessee is entitled to claim the rebate of such duty.

Relying on a decision in the case of Repro India Ltd. v/s Union of India [(2009) 235 ELT 614 (Bom)] which is followed by various other High Courts, it was submitted that duty paid inputs are used in the manufacture of dutiable final products as well as exempted final products and if both the final products are exported, then Rule 6(1) to Rule 6(4) would not apply and, therefore, the argument of the Revenue that in such a case, the input credit lapses cannot be sustained.

Reasoning of Judgment:- The High Court observed that under Rule 6 (1) credit of duty paid on inputs is not allowable when the inputs are used in the manufacture of exempted final products but Rule 6 (2) provides that where the inputs are used in the manufacture of exempted as well as dutiable final products, then credit of duty paid on inputs used in the manufacture of dutiable final products is allowable provided separate accounts are maintained regarding consumption, receipt and inventory of input used in manufacture of dutiable final product. It was noted that Rule 6 (6) carves an exception to the applicability of provisions contained in Rule 6 (1) to 6 (4) in certain specified cases including the case where export is made without payment of duty.

In the facts of the present case, it was noted that the exempted menthol crystals as well as dutiable peppermint oil manufactured out of duty paid menthol have been exported by the Assessee, the provisions of Rule 6(1) to 6(4) of the 2004 Rules are not applicable. In other words, the credit of duty paid on menthol used in the manufacture of exempted menthol crystals is allowable, because, exempted menthol crystals have been exported under bond without payment of duty.

It was further noted that Rule 5 of 2004 Rules, specifically peovides that where the exempted final product is cleared without payment of duty under bond, then the credit of duty paid on input used in the manufacture of exempted final product shall be allowed to be utilized for payment of duty on any final product by way of adjustment of input credit and where for any reasons such adjustment is not possible, then refund of the unutilized input credit would be allowed.

It was held that since the credit of duty paid on input used in the manufacture of exempted final product is utilized for payment of excise duty on exported peppermint oil, the assessee instead of getting refund of input credit under Rule 5, is entitled to rebate of duty paid on exported peppermint oil as provided under Rule 18 of the CER, 2002.

With regard to issue of lapsing of credit of duty paid on menthol, it was noted that the exempted menthol crystals has been exported without payment of duty under bond and therefore, assessee was entitled to avail the Cenvat credit of duty paid on menthol used in the manufacture of exempted menthol and utilize the said credit for payment of duty on clearance of peppermint oil. Since peppermint oil was exported on payment of duty, the assessee was entitled to claim rebate of duty paid on exported peppermint oil under Rule 18 of CER, 2002.

In the end it was held that since the exempted menthol crystals as well as dutiable peppermint oil manufactured out of duty paid menthol have been exported by assessee, the provisions of Rule 6(1) to 6(4) of CCR, 2004 are not applicable and as per Rule 5, assessee was entitled to avail cenvat credit of duty paid on menthol used in the manufacture of exempted menthol crystals and utilize the said credit for payment of duty on clearance of peppermint oil either for home consumption or for export. Since the peppermint oil has been exported on payment of duty, the assessee was entitled to claim rebate of the duty paid on peppermint oil.

For all the aforesaid reasons, the petition filed by Revenue fails. Assessee entitled to rebate of duty paid on peppermint oil amounting to Rs.38,03,89,634/- deposited in this Court by the Commissioner of Central Excise, Raigad pursuant to the order passed in Writ Petition No.8068 of 2010. It was directed to pay that amount of Rs.38,03,89,634/- to the Assessee.

It was further held that Revenue has sought stay of the operation of this order for four weeks but there was no reason to stay the operation of our order because, firstly, in the past the Commissioner of Central Excise has himself allowed similar rebate claims of the assessee. Secondly, the Joint Secretary to the Government of India is also of the opinion that it is not a fit case for grant of stay and thirdly, even in the opinion of the High Court, the provisions are clear and unambiguous and the delay in allowing the rebate claim for all these years, has already caused prejudice to the Assessee and, therefore, it would not be proper to cause any further prejudice to the Assessee by granting stay of our order.

Decision:- Writ petition dismissed.

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PJ/Case Laws/2011-12/1294

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